The modaraba sector can rightly take
pride in not only being the pioneer of Islamic financing in Pakistan but also
being the first among the Muslim countries. The sector has endured various ups
and down successfully mainly because of a very strong business model, active
support of the government and regulators and above all pragmatic policies of the
players.

These modarabas undertake a variety of
business including Ijarah and use Murabaha and Musharikah and other Sharia'h
modes of financing. One of the modarabas also issued Shariah compliant debt
instrument for mobilizing funds. One of the incentives available to this sector
for a long time is, income tax exemption if the modaraba management company
distributes up to 90% of its profit among the certificate holders. The largest
contribution of the sector is that it caters to the needs of small and medium
enterprises. Prudent financing has helped in containing delinquent loans.

Last year the Modaraba Association of
Pakistan (MAP) in collaboration the regulators redrafted the existing model
agreements and also succeeded in developing new products. Its efforts yielded
results as the Religious Board approved the model agreements. This will provide
a level playing field to the members of the modaraba sector to diversify their
activities by offering new products.

The global financial crisis has created
great opportunities for Islamic finance. The Islamic finance industry is
continuously flourishing world over. The estimated size of the industry is
presently valued at US $ 800billion. This industry is one of the fastest growing
financial segments in the world, which is increasing around 20% annually.

In Pakistan, the Islamic finance
industry is being continuously encouraged and promoted by the regulators and the
players. There is remarkable growth in Islamic banking as well as in non-banking
Islamic financial activities such as Islamic mutual funds, Takaful and Modaraba.

For the development of non-banking
Islamic financial services, the Securities & Exchange Commission of Pakistan (SECP)
has been playing a key role by creating an enabling environment and level
playing field.

Due to this proactive approach and
support of the regulator, the performance of Modaraba sector for the year ended
June 30, 2008 was excellent in every area including assets size, equity,
paid-up-capital, and profitability.

Out of 24 Modaraba, 18 declared cash
dividend ranging from 2.5% to 40%. The cumulative profit of the member companies
of MAP was Rs962 million as compared to Rs749 million a year ago, showing an
increase of 28%. Total Asset of these entities increased to Rs29 billion from
Rs26 billion during this period, registering a growth of 12.0%.

The MAP has been consistently making
efforts for the promotion of the sector. Last year the Association focused on
areas like research and product development, creating awareness about Islamic
financials system among the members, improving Sharia'h compliance, and
promotion of Modaraba model in country level as well as on international
platform.

Besides these priorities, at the
beginning of current year MAP also realized the need to further strengthen the
risk management among the companies providing financial services. Interactive
seminars and workshops

Furthermore, the Association is working
inn other areas such as dialogue with takaful companies so that they can design
and structure different risk mitigation products according to the requirement of
Modaraba companies.

The Association is also considering
issuing quarterly newsletter, which will cover development within the sector,
its performance, and undertaking discussions on Islamic mode of finance, and
debate on Sharia'h related issues. The newsletter will also cover other news on
Islamic finance on national and international level as well.

Following Shariah covenants and
achieving highest level of governance is also on the agenda of MAP. Last year
Association appointed Mufti Abdul Sattar Laghari Sahib a full time Shariah
advisor. Mufti Sahib continuously makes liaison with the members through
Associations and satisfactorily addresses the Shariah issues of the members.

Islamic financial services sector has
witnessed a phenomenal growth in the recent times and Modaraba operators have
established their niche market. This model being followed in Pakistan is unique
and earned recognition in Islamic financial services sector all over the world
due to its well-designed structure properly laid down rules and regulations by
the regulators.

In spite of present difficult operating
business environment, the Modaraba sector has been performing reasonably well.
Financial results declared for the period ended March 31, 2009 have been much
satisfactory when compared to other companies falling in the category of NBFCs.
This is a matter of comfort and satisfaction for all of us.

On the request of the Association, a
Religious Board for Modarabas has been reconstituted. The Board is playing a
very important role for the development of Modaraba sector.